Should trail commissions go to mortgage borrowers?

Speaking at the Australian Securities and Investments Commission’s (ASIC) Annual Forum last Tuesday, Peter Harris, Chairman of the Productivity Commission, restated his concern regarding the payment of trail commissions.

Despite ASIC’s remuneration review concluding that ongoing trail commissions “usually provide an incentive to aggregators and brokers to put forward higher-quality loans where consumers are less likely to default on their obligation,” and despite several industry figures giving evidence at public hearings last month of the benefits and necessity of trail commissions, Harris suggested that trail should instead be paid to borrowers.

Also read: How do mortgage brokers get compensated?

Peter said the evidence hadn’t convinced him that trail commissions benefit customers.

“[It] is purported to be the case that [trail commissions] are either paid by the banks in order for the broker to look after you during the period of the loan. But when we ask the banks, ‘Are there any performance standards that go with this in return for your money? Have you asked them if they’ve spoken to the customer in the last 12 months?’, the answer generally appears to be no.

“[There’s] a good chunk of money out there paying for service for which there is no performance standard, which is an interesting development. The other rationalisation is [that] it’s there to stop churn.”

However, there was conflicting evidence given surrounding churn, according to Harris.

“In some cases, exactly the same broker representative who told us that churn wasn’t relevant [was] in a public statement, on record, saying it was exactly the reason why [brokers are] getting these payments,” he said. “Somewhere, someway, someone is going to have to deal with this question of commission.”

Harris suggested that instead of banks paying brokers trail commission, the payment should instead be made directly to the borrower.

“There are alternatives into the idea of a [trail] commission paid to a broker. The average $665 a year payment could be paid to the consumer not to switch loans,” he said.

The final draft of the Productivity Commission’s report, due in July, is likely to address the impact trail commissions have had on competition.